Seven vessels of Global Ship Lease' were re-chartered at lower rates than the rates in the existing contracts during 2017 and 2018

We forecast a moderate reduction in EBITDA to $100 million-$105 million in
2017 (from $115 million in 2016) followed by a more pronounced drop to $80
million-$85 million in 2018, after seven vessels were re-chartered at lower
rates than the rates in the existing contracts during 2017 and 2018. According
to our base case, debt reduction will counterbalance the impact of lower
EBITDA, which will result in a weighted average ratio of S&P Global
Ratings-adjusted funds from operations (FFO) to debt of 14%-15% in 2017-2018,
which favorably compares with a 'B' rating guideline of more than 9%.
We believe that the risk of nonperformance by CMA CGM (a France-based
container liner and the largest charterer of GSL) under the contracts with GSL
has diminished considerably. This is because of the recovery of freight rates
for container liners and the resulting improved credit quality of CMA CGM over
the past 12 months. We also note that the improved charter rates for tonnage
providers (such as GSL), and the resulting smaller gap between market rates
and GSL's contracted rates make the charter contracts less prone to
amendments. That said, GSL's current charter rates with CMA CGM and Orient
Overseas Container Liner (OOCL; a China-based container liner) are still about
twice the market rate.
In our view, GSL's substantial dependence on CMA CGM, which leases 15 of its
vessels, and its fairly narrow business model built around 18 containerships,
continue to constrain its business profile. We furthermore consider the
container shipping sector to have higher-than-average industry risks. This, we
believe, stems from the industry's capital intensity, high fragmentation,
frequent supply and demand imbalances, lack of meaningful supply discipline,
and limited ability to differentiate services provided.
We believe GSL's long-to-medium-term time-charter profile, underpinned by
attractive rates, will support its predictable EBITDA generation and partly
mitigate these risks. We understand that the charter profile includes fully
noncancellable contracts, has a remaining average duration of 3.3 years, and
implies about $550 million of future contracted revenues as of June 30, 2017.
This should add to operating visibility, provided CMA CGM and OOCL deliver on
their commitments, which we assume in our base case. Furthermore, GSL benefits
from its competitive and predictable cost base, with no exposure to volatile
bunker fuel prices and other voyage expenses, which are borne by the
counterparty as stipulated in the time-charter agreements.